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Didi, Grab, and the future of Asia’s ride-hailing giants

Written by Caiwei Chen Published on   8 mins read

As Didi and Grab eye potential US IPOs, defining a strategy for new services is crucial as they continue their overseas expansions.

You know how it works: press a button on your phone, and a ride shows up, prepared to take you to your destination. A few companies have taken this concept and made it their own. Didi was the first to take it to a point where even Uber couldn’t handle the competition, offering a reference for how to take on the American company to the likes of Grab in Southeast Asia.

Now, both Didi and Grab are eyeing the public markets, and their ambitions are shifting beyond just passenger transport to diversify revenue streams and reach new markets.

Didi defines ride-hailing in China. The company has now come to a key juncture as it develops a global presence—it is preparing an initial public offering in the United States and will carry a valuation of USD 70–100 billion for its IPO. At present, Didi’s overseas services span Japan, Australia, Russia, and South American countries, with 550 million users worldwide.

The road to becoming synonymous with ride service in China and forming a notable presence beyond its home market was bumpy. Didi had to fend off competition from domestic companies like Kuaidi as well as seasoned player Uber. Passenger safety was a key concern in 2018 and 2019 when two women who used Didi were attacked and killed by their drivers. Then came the pandemic and lockdowns. Yet Didi has managed to weather these storms and is constantly refining its operations at home and abroad.

Didi Chuxing has dominated China’s ride-hailing scene since gobbling up Uber’s operations in the country in 2016. Photo source: Shutterstock.com

Much more than a local leader

Founded in 2012 by Cheng Wei, an Alibaba alum who worked his way up from a sales manager’s desk to deputy general manager, Didi planted roots in Zhongguancun, a tech hub in Beijing. The goal was simple: match people who needed rides with idle drivers who were already on the road.

A year later, Uber started to do the same in China, transplanting its Silicon Valley model of thinking from across the Pacific to the country’s biggest cities. Long story short, Didi burned a bonfire of cash for subsidies, merged with local competitor Kuaidi Dache (a move facilitated by mutual investors Tiger Global, Ping An Insurance, and Hillhouse Capital), found a fan in Apple’s Tim Cook, and gobbled up Uber’s China operations in exchange for a 17.7% stake in 2016.

Didi’s operations have a practical bent imprinted by Cheng Wei, a man described by GGV managing partner Hans Tung as a jianghu figure, pointing to Cheng being a true hustler. His macho, no-nonsense attitude functions in tandem with the power-brokering of Jean Liu, a former Goldman Sachs executive who was recruited after she went on a “soul-searching” journey to Tibet with Didi’s senior leadership.

Didi’s rides may not blanket the globe like Uber’s, but it has a global presence through the checks it has written for Southeast Asia’s Grab, India’s Ola, Lyft in the US, Europe’s Taxify, and Careem in the Middle East. These investments braided its fate with Uber’s, which also holds stakes in many of these companies. Meanwhile, Didi’s funding for Lyft pits it against Uber on its home turf. By 2018, Didi had set up its international business division and acquired Brazil’s largest ride-sharing company, 99.

To date, Didi is active in 14 countries outside of China, with operations mainly consisting of transportation and food delivery. Didi tends to operate in the global south and nowhere near its home base: the company has planted its flag in South Africa, Australia, New Zealand, Japan, Brazil, Mexico, Chile, Colombia, Peru, Costa Rica, Panama, Russia, Dominica, and Argentina.

Chinese media LatePost quoted insider sources saying that Didi currently has more than 50 million users in overseas markets and has completed more than 1 billion trips and takeaway orders in the past year. However, sources also said that the pandemic had hit the company’s overseas business hard, and its global expansion stagnated in 2020.

Governmental oversight is catching up with Didi at home too. Online ride regulations implemented in 2016 slashed the number of drivers that could work for Didi. New energy vehicle platforms, conventional coach and taxi companies, and traffic-heavy apps like Alibaba-backed Amap (formerly AutoNavi) and Meituan could all eat into its profits.

“These challenges have all led to a decline in Didi’s domestic passenger carrying capacity,” said Yang Yongping, executive director of investment research firm EqualOcean. “The corresponding shift in Didi’s thinking is to become an aggregated platform that allows people to access the service,” said Yang.

But that too may be insufficient to overcome the hardships at home. Recently, Didi was one of the numerous tech companies caught in the dragnet of an antitrust crackdown.

As Didi and Grab go public, who’s set for windfalls?

Despite its aggressive overseas expansion and Chinese firms’ affinity for landing in Southeast Asia, Didi has avoided competing head-to-head with Grab in the region. This is partly because there was little space for a new entrant to take on Grab and Gojek, and also because of the goodwill between Didi and Grab.

Didi became an investor in Grab when it poured in money for a USD 350 million funding round in July 2017. But the two companies have much more in common. They both started locally, faced direct competition from Uber, and walked away as winners by focusing on unique local needs. In fact, Grab co-founder Anthony Tan cites Didi’s absorption of Uber’s China operations as inspiration for his company’s move to do the same in Southeast Asia.

The ties go deeper, through shared investor SoftBank, which fueled the two companies’ expansion and will be looking to cash in on their upcoming US IPOs.

“SoftBank’s deep involvement in ride-hailing has made it the real king in this sector,” said Kaustubh Agnihotri, product lead at Amazon and ride-hailing industry observer. “SoftBank can bring sense to the table amid intensely fought battles in regional markets by boosting major players’ dominance, causing a potential correction of the highly subsidized price, incentives, and commission, as well as a shift towards more ‘shared’ rides, which promises higher productivity and greater returns for investors.”

SoftBank has been involved in every round of investment in Grab since its Series D in 2014. According to Murten Ventures, before the H round, Grab’s three largest shareholders were Uber (27.5%), SoftBank (20%), and Didi (14%).

Although the amount of SoftBank’s investment in Grab is not known, already-public records indicate that SoftBank may be the largest shareholder of Grab after the most recent funding round. SoftBank is currently the largest shareholder of both Uber (16.3%) and Didi (20%).

SoftBank’s USD 100 billion Vision Fund is a significant shareholder in several global travel companies, such as Brazil’s 99 and India’s Ola. The two upcoming IPOs could mean big profits for SoftBank. SoftBank’s stock price is influenced by the performance of its listed investments and could experience a rise if the two companies have successful IPOs.

SoftBank has been a long-time backer of Asia’s two largest ride-hailing companies, both of which are now evolving to offer more services. Photo source: Tuchong.

In April 2021, Grab agreed to merge with a special purpose acquisition company (SPAC) backed by Silicon Valley investor Altimeter Capital Management. This will allow for a backdoor listing on the Nasdaq, seeing nine-year-old Grab raise over USD 4 billion, a record US offering from Southeast Asia. The IPO will also mark the largest SPAC in history with a market capitalization of USD 34 billion if Grab is successfully listed.

But in complete contrast to Didi’s merger with Uber China, which took nearly a year to recuperate after the merger to sort out internal adjustments and prepare for global expansion, Grab has instead accelerated its business expansion on growing other non-transportation verticals, such as GrabFood and Grab Financial Group. In the past few years, and accelerated by the pandemic’s impact on its core transportation business, Grab has evolved from a ride-sharing app to a one-stop “super app” that combines Doordash, Uber, Alipay, and fast delivery.

The diversified business has helped to drive Grab’s revenue growth. According to Momentum Works, Grab contributed nearly half of Southeast Asia’s food delivery gross merchandise value in 2020, hitting USD 5.9 billion.

The two ride-hailing giants, armed with lots of cash after IPOs, would be poised to expand their services to look for new revenue channels. While Didi’s attempt to compete with Meituan in the realm of takeout in 2018 did not turn out well, the company is pouring cash into its community grocery buying business recently. Meanwhile, Grab’s venture into local services proved to be a more fruitful one.

According to the company’s financial results in the first quarter of 2021, GrabFood saw its GMV grow by over 400% across the region, led by Indonesia, Thailand, and the Philippines, while GrabPay increased total payments volume by 170%.

Didi and Grab’s horizontal expansion could fuel greater inclusions of small and medium-sized businesses into the digital economies of their respective markets. From local restaurants to farmers and small merchants, these businesses can ride on the momentum of ride-hailing platforms to increase their customer base and modernize their operations.

As the COVID-19 pandemic decimated revenue from ride-hailing in 2020, Grab began focusing on other business lines such as retail and e-commerce. Photo source: Shutterstock.com

How will going public alter Didi’s strategy?

Industry sources believe that Didi will stick to international expansion after its IPO, and the funds raised will fuel its competition in the international market.

“After the US IPO, Didi will inevitably ramp up support for its overseas business units in order to reassure overseas investors. After becoming a public company, Didi must find more imaginative markets to prop up its price range,” Yang said.

Unlike other internet giants, Didi’s main business of ride-hailing is highly dependent on offline traffic, and its revenue composition relies heavily on the commission drawn from driver-customer transactions. The pandemic, which left drivers stranded and unable to take orders, directly led to a sharp drop in Didi’s revenue. More importantly, the epidemic is far from over globally, and there is the possibility that Didi’s main business will continue to be impacted in the face of uncertainty.

But Didi worked hard to find several new verticals during the epidemic. The company launched Chengxin Youxuan, its response to China’s community group buying trend that emerged last year, where clusters of local residents gain access to discounts by buying groceries together in bulk.

Didi has actively tried to squeeze itself into the lower-tier and less mature market by launching a standalone, low-cost subsidy app Huaxiaozhu, which allows drivers that do meet the strictest regulatory standards to provide services at a lower price. Didi joined the car-making craze and began testing autonomous driving technology alongside Baidu, Xiaomi, and other companies. The firm is spinning off its self-driving business, looking to list the unit via an independent IPO.

Nonetheless, Yang believes these attempts have not proven effective in terms of concrete financial metrics. “Didi must cement a solid voice in the Chinese market before making its way overseas. But Didi’s dominance in China at the moment is still not unshakable. With platforms such as Amap cutting in, several of Didi’s business lines are facing challenges.”

This pressure to prove itself to investors is reflected in Didi’s goals. Last year, Cheng Wei, CEO of Didi, announced the strategic targets for the next three years, internally named “0188”: Safety is the cornerstone of Didi’s development because, without safety, everything comes back to zero; reach 100 million global daily rides; comprise 8% of China’s mobility market; reach over 800 million global services MAUs. The ambitious objectives, if realized, will mark another milestone in Didi’s crusade abroad.

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